Calculating Your Home Equity

Calculator for crunching numbers. Examining home equity.Knowing the amount of equity you have in your home can be beneficial, especially if you’re thinking of applying for a mortgage refinance.

Calculating your home equity is fairly easy to do. You simply take the current market value of your home and subtract what you owe. For instance, if you have a home that is currently valued at $200,000 and you owe $80,000 in principal on your home loan, then your equity would total $120,000.

Keep in mind that your equity will not stay constant. As the market shifts, so will your home’s value. Additionally, any improvements you make or damages that occur can consequently add to or deduct from your home’s value.

The simplest way to increase your equity is to pay down your mortgage. It should be noted, however, that paying off your principal balance is what really improves your equity – not paying off the interest. Because most of your beginning payments will go toward paying off interest, your equity will build slowly at first.

There is a way to build equity faster, and that is by shortening the term of your mortgage. Switching from a 30 year home loan to a 15 year fixed rate loan will increase your monthly payment, but a larger amount will also be put toward the principal each month. This is becoming a popular option for people who want to own their homes outright and be mortgage free sooner.

If the balance of your mortgage is more than your home’s value, that is known as negative equity. Negative equity can occur with interest-only mortgages, where (as the name implies) your mortgage payments go toward paying only the interest and you are responsible for paying the principal balance at the end of the loan term. Falling property values can also result in many homeowners having negative equity.

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